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Weekly investment update – Transitory or persistent?

Stronger inflation data in the US again fuels the ‘transitory-versus-persistent’ debate on the fundamental nature of inflationary pressures. It is a discussion that has further to run. Although as fickle as ever, bond markets seem to be adhering to…

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Stronger inflation data in the US again fuels the ‘transitory-versus-persistent’ debate on the fundamental nature of inflationary pressures. It is a discussion that has further to run. Although as fickle as ever, bond markets seem to be adhering to the ‘transitory’ school of thought.

Covid-19 – Further headwinds

New cases have continued to climb around the world and are now at 440 000 per day, up from 390 000 last week. A rise in cases in Asia, Europe, and North America has offset a decline in South America over the past week.  In the UK, where the Covid situation is considered to be 8-12 weeks ahead of continental Europe, new cases have accelerated to above 30 000 per day.

For advanced economies with better vaccine coverage, the consensus view for the moment appears to be that the spread of the Delta variant will not translate into renewed lockdowns. This analysis is supported by the still low hospitalisation rates. A more significant risk is arguably that rising case numbers dampen consumer confidence and delay the recovery in household spending.

In the US, a voting member of the rate-setting Federal Open Markets Committee warned last week that the spread of the Delta variant and low vaccination rates in some parts of the world threatened the global recovery. Mary Daly urged caution in removing monetary support for the US economy and suggested one of the biggest risks to global growth was a premature declaration of victory over Covid. The president of the Federal Reserve Bank of San Francisco went on to warn that if the global economy cannot boost vaccination rates to overcome Covid rapidly, US growth faced a headwind.

More caution from the US Federal Reserve

The minutes for the June meeting of the FOMC offered no additional hawkish elements to further roil markets which had not expected US central bank officials to predict they would be raising interest rates sooner and more aggressively than they had signalled earlier this year.

If anything, in the minutes, FOMC participants messaged caution when assessing economic progress and the odds of the Fed tapering its asset purchases, while underscoring uncertainty and the associated high bar for decision-making.

Fed Chair Jay Powell is expected to deliver a similar message to Congress this week ahead of the FOMC meeting on 25-27 July.

However, US inflation again surged in June

Data published this week showed the pace of US consumer price increases accelerated unexpectedly in June. This challenges the view within the Fed that high inflation during the US recovery will be temporary. The consumer price index rose at the fastest pace since August 2008, up by 5.4% from the previous year. This is well above the 5% rise reported in May and the 4.9% consensus forecast.

On a monthly basis, prices rose by 0.9% for the biggest single-month jump since June 2008. The core data (stripping out volatile items such as food and energy) showed US inflation rose from 3.8% YoY in May to 4.5% in June.

Price rises have so far been most significant in sectors directly affected by the coronavirus pandemic.

Source: BNP Paribas Asset Management, Bloomberg as of 13/07/2021

Travel-related expenses such as airfares have soared, while a semiconductor shortage has contributed to a jump in the prices of used cars. One-third of the rise in the CPI in June was due to a record jump in previously-owned car prices. They rose by 10.5% in June from the previous month.

Car prices have been zooming away

The report shows reopening-sensitive sectors (used cars, rental cars, vehicle insurance, lodging, airfares, and food away from home) dominating price pressures for a third straight month.

Car prices, especially used car prices, have been surging thanks to a combination of high demand from rental car companies (who let their fleets dwindle in the early months of the pandemic), buying appetite boosting stimulus cheques from the administration and severe (semiconductor) bottlenecks in car production.

Auction data for used cars suggests the worst of the price pressures should be behind us soon, and media reports from Taiwan say that waiting times for semiconductors for use in automobiles are shrinking. Taken together, that implies price pressure should ease in the months ahead.

One area where prices are rising for non-transitory reasons is in housing. House prices are hitting the roof as upper income consumers, flush with savings and benefiting from very low mortgage rates, search for property. However, as asset prices, these have no more place in the CPI than equity prices do. What matters for inflation is rents. These have begun to pick up as the labour market improves.

Temporary or time for a taper?

The Fed has continued to characterise rising inflation as ‘transitory’. The pressures should fade as Covid-19 lockdowns ease further and supply catches up with pent-up demand. At their meeting in June, Fed officials predicted that their preferred gauge of core inflation would rise by 3% this year, before falling back down to 2.1% in 2022.

This latest surprisingly high inflation report could put pressure on the Fed to consider slowing monetary stimulus by reducing its asset purchases more quickly than previously thought. Should the Fed continue to make quantitative easing (QE) asset purchases of USD 120bn per month? Chair Powell’s testimony to Congress on Thursday (and the August Jackson Hole conference) could provide opportunities for hints with regard to an upcoming taper.

US bond yields seesaw

US government bonds seesawed after the strong inflation data: yields initially rose further from the lows (at 1.25% last week) seen since the Fed’s monetary policy meeting in June and its ‘dot plot’ forecasts which had been as hawkish.

Subsequently, a weak auction of 30-year US Treasury debt jolted markets. Yields of the benchmark 10-year US Treasury rose by 0.05 percentage points on the day to 1.42%.

Keep an eye on oil prices

In the second week of March 2020, the Organisation of Petroleum Exporting Countries (known as OPEC, but expanded to ‘OPEC+’ after Russia joined its deliberations) held a disastrous meeting in which it failed to agree on production levels. As a result, the oil price plummeted.

Last week, OPEC+ again failed to reach an agreement on production increases. The result, this time, has been to push the oil price upward. Brent crude has now risen by almost 400% since last year’s low and at USD 76/barrel, it is approaching its peak from 2018.

The rise in oil prices is expected to lift inflation further globally. Moreover, the recent rebound in oil prices will continue to support inflows into energy-related stocks and the US high-yield energy sector.

Upcoming US economic data – Retail sales

Retail sales data is expected to show elevated growth in June, with the consensus expecting a 0.4% month-on-month (MoM) rebound.

The bottom line remains that retail sales are well above their pre-Covid trend. We also note that as the economy continues to reopen and normalise, services will likely comprise the bulk of the catch-up in consumer spending.

A strategy update at the ECB

In the past, the European Central Bank was generally considered to have a slightly hawkish tilt (relative to other central banks). Its mandate for price stability was interpreted as calling for inflation to remain close to, but below 2%. The ECB’s strategy review, its first since 2003, has resulted in a modest update, aimed at making its goals clearer.

From now on, the ECB will now have a symmetric inflation target; inflation that is either below or above 2% will be ‘equally undesirable’. Additionally, the ECB will tolerate a transitory period of ‘overshooting’ if a sustained period of near-zero interest rates threatens the central bank’s credibility in hitting its inflation target.

This new target arguably does away with any hawkish bias that may have contributed to the ECB consistently undershooting its inflation target since the 2008 financial crisis. ECB President Lagarde confirmed that unconventional tools such as QE would remain part of the ECB’s armoury.

This shift represents an adjustment rather than an overhaul of ECB monetary policy. For example, unlike the Fed, the ECB will not target ‘average inflation’, allowing prices to rise faster to compensate for past shortfalls. A change to include housing in its chosen measure of inflation is limited to the cost of owner-occupied housing — which usually changes only modestly year-to-year — rather than actual house prices.

Last but certainly not least, a ‘climate action plan’ aims to ensure that companies whose bonds the ECB purchases are acting in line with the goals of the Paris climate accords.

A dovish measure from China’s central bank

To counter China’s current economic slowdown, the People’s Bank of China has the reserve requirement ratio (RRR) to enhance support for the real economy and micro, small and medium-sized businesses.

The news was a positive surprise to the market given the contraction in credit and the economic slowdown over recent owing to tardy fiscal expenditure and tightening policies in the property and internet space. The central bank’s move was seen as pre-emptive. It suggests room for manoeuvre should the challenges worsen.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Andrew Craig. The post Weekly investment update – Transitory or persistent? appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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Economics

After a near 10% rally this week can the Netflix share price make a comeback?

The Netflix share price rallied by nearly 10% (9.6%) this week after co-CEO Ted Sarandos confirmed the film and television streaming market leader is to…

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The Netflix share price rallied by nearly 10% (9.6%) this week after co-CEO Ted Sarandos confirmed the film and television streaming market leader is to introduce a new ad-supported, cheaper subscription. The company also announced it is to lay off another 300 employees, around 4% of its global workforce, in addition to the 150 redundancies last month.

Netflix has been forced into a period of belt-tightening after announcing a 200,000 subscriber-strong net loss over the first quarter of 2022. The U.S. tech giant also ominously forecast expectations for the loss of a further 2 million subscribers over the current quarter that will conclude at the end of this month.

netflix inc

The company has faced increasing sector competition with Paramount+ its latest new rival, joining Amazon Prime, Disney+, HBO Max and a handful of other new streaming platforms jostling for market share. A more competitive environment has combined with a hangover from the subscriber boom Netflix benefitted from over the Covid-19 pandemic and spiralling cost of living crisis.

Despite the strong gains of the past week, Netflix’s share price is still down over 68% for 2022 and 64% in the last 12 months. Stock markets have generally suffered this year with investors switching into risk-off mode in the face of spiralling inflation, rising interest rates, fears of a recession and the geopolitical crisis triggered by Russia’s invasion of Ukraine.

Growth stocks like Netflix whose high valuations were heavily reliant on the value of future revenues have been hit hardest. No recognised member of Wall Street’s Big Tech cabal has escaped punishment this year with even the hugely profitable Apple, Microsoft, Alphabet and Amazon all seeing their valuations slide by between around 20% and 30%.

But all of those other tech companies have diversified revenue streams, bank profits which dwarf those of Netflix and are sitting on huge cash piles. The more narrowly focused Meta Platforms (Facebook, WhatsApp and Instagram) which still relies exclusively on ad revenue generated from online advertising on its social media platforms, has also been hit harder, losing half of its value this year.

But among Wall Street’s established, profitable Big Tech stocks, Netflix has suffered the steepest fall in its valuation. But it is still profitable, even if it has taken on significant debt investing in its original content catalogue. And it is still the international market leader by a distance in a growing content streaming market.

justwatch

Source: JustWatch

Even if the competition is hotting up, Netflix still offers subscribers by far the biggest and most diversified catalogue of film and television content available on the market. And the overall value of the video content streaming market is also expected to keep growing strongly for the next several years. Even if annual growth is forecast to drop into the high single figures in future years.

revenue growth

Source: Statista

In that context, there are numerous analysts to have been left with the feeling that while the Netflix share price may well have been over-inflated during the pandemic and due a correction, it has been over-sold. Which could make the stock attractive at its current price of $190.85, compared to the record high of $690.31 reached as recently as October last year.

What’s next for the Netflix share price?

As a company, Netflix is faced with a transition period over the next few years. For the past decade, it has been a high growth company with investors focused on subscriber numbers. The recent dip notwithstanding, it has done exceedingly well on that score, attracting around 220 million paying customers globally.

Netflix established its market-leading position by investing heavily in its content catalogue, first by buying up the rights to popular television shows and films and then pouring hundreds of millions into exclusive content. That investment was necessary to establish a market leading position against its historical rivals Amazon Prime, which benefits from the deeper pockets of its parent company, and Hulu in the USA.

Netflix’s investment in its own exclusive content catalogue also helped compensate for the loss of popular shows like The Office, The Simpsons and Friends. When deals for the rights to these shows and many hit films have ended over the past few years their owners have chosen not to resell them to Netflix. Mainly because they planned or had already launched rival streaming services like Disney+ (The Simpsons) and HBO Max (The Office and Friends).

Netflix will continue to show third party content it acquires the rights to. But with the bulk of the most popular legacy television and film shows now available exclusively on competitor platforms launched by or otherwise associated with rights holders, it will rely ever more heavily on its own exclusive content.

That means continued investment, the expected budget for this year is $17 billion, which will put a strain on profitability. But most analysts expect the company to continue to be a major player in the video streaming sector.

Its strategy to invest in localised content produced specifically for international markets has proven a good one. It has strengthened its offering on big international markets like Japan, South Korea, India and Brazil compared to rivals that exclusively offer English-language content produced with an American audience in mind.

The approach has also produced some of Netflix’s biggest hits across international audiences, like the South Korean dystopian thriller Squid Games and the film Parasite, another Korean production that won the 2020 Academy Award for best picture – the first ever ‘made for streaming’ movie to do so.

Netflix is also, like many of its streaming platform rivals, making a push into sport. It has just lost out to Disney-owned ESPN, the current rights holder, in a bid to acquire the F1 rights for the USA. But having made one big move for prestigious sports rights, even if it ultimately failed, it signals a shift in strategy for a company that hasn’t previously shown an interest in competing for sports audiences.

Over the next year or so, Netflix’s share price is likely to be most influenced by the success of its launch of the planned lower-cost ad-supported subscription. It’s a big call that reverses the trend of the last decade away from linear television programming supported by ad revenue in its pursuit of new growth.

It will take Netflix at least a year or two to roll out a new ad-supported platform globally and in the meanwhile, especially if its forecast of losing another 2 million subscribers this quarter turns out to be accurate, the share price could potentially face further pain. But there is also a suspicion that the stock has generally been oversold and will eventually reclaim some of the huge losses of the past several months.

How much of that loss of share price is reclaimed will most probably rely on take-up of the new ad-supported cheaper membership tier. There is huge potential there with the company estimating around 100 million viewers have been accessing the platform via shared passwords. That’s been clamped down on recently and will continue to be because Netflix is determined to monetise those 100 million viewers contributing nothing to its revenues.

If a big enough chunk of them opt for continued access at the cost of watching ads, the company’s revenue growth could quickly return to healthy levels again. And that could see some strong upside for the Netflix share price in the context of its currently deflated level.

The post After a near 10% rally this week can the Netflix share price make a comeback? first appeared on Trading and Investment News.

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Government

Aura High Yield SME Fund: Letter to Investors 24 June 2022

The RBA delivered a speech this week indicating faster monetary policy tightening is to come in the near-term with the aim of curbing the rate of inflation….

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The RBA delivered a speech this week indicating faster monetary policy tightening is to come in the near-term with the aim of curbing the rate of inflation.

Inflation and Monetary Policy 1,2

This week, RBA Governor Philip Lowe spoke about the department’s monetary policy intervention to tackle inflation in the evolving economic environment. Over the last six months, similar factors have continued to put pressure on food and energy prices – namely the war in Ukraine, foods on the East coast, and Covid lockdowns in China. The ongoing lockdowns in China are causing disruptions in manufacturing and production and supply chains coupled with strong global demand that is unable to be met. These pressures have forced households and businesses to absorb the rising cost of living.

To demonstrate the rise, the RBA reporting this week on Business Conditions and Sentiments saw:

  • Almost a third of all businesses (31 per cent) have difficulty finding suitable staff;
  • Nearly half (46 per cent) of all businesses have experienced increased operating expenses; and
  • More than two in five businesses (41 per cent) face supply chain disruptions, which has remained steady since it peaked in January 2022 (47 per cent).

* The Survey of Business Conditions and Sentiments was not conducted between July 2021 to December 2021 (inclusive)

Inflation is being experienced globally, although Australia remains below that of most other advanced economies sitting at 5.1 per cent. The share of items in the CPI basket with annualised price increases of more than 3 per cent is at the highest level since 1990 as displayed in the graph below.

With additional information on leading indicators now on hand, the RBA has pushed their inflation forecast up from 6 to 7 per cent for the December quarter, due to persistently high petrol and energy prices. After this period, the RBA expects inflation will begin to decline.

We are beginning to see pandemic-related supply side issues resolve, with delivery times shortening slightly and businesses finding alternative solutions for global production and logistic networks. Whilst there is still a way to go in normalising the flow in the supply side and the possibility that further disruptions and setbacks could occur, the global production system is adapting accordingly, which should help alleviate some of the inflationary pressures.

The RBA’s goal is to ensure inflation returns to a 2-3 per cent target range over time, with the view that high inflation causes damage to the economy, reduces people’s purchasing power and devalues people’s savings.

Household Wealth 3

Growth of 1.2 per cent in household wealth, equivalent to $173 billion, was reported in the March quarter. The rise was a result of an increase in housing prices in the March quarter. Prices have started reversing since that read.

Demand for credit also boomed, with a record total demand for credit of $218.8 billion for the March quarter. The rise was driven by private non-financial corporations demanding $153.2 billion, while households and government borrowed $41.9 billion and $17.5 billion respectively. 

We will likely see a significant shift in household wealth and credit demand in next quarter’s report given the rising interest rate environment, depressed household valuations and elevated pricing pressures. 

Portfolio Management Commentary

A lag in leading economic indicators has shifted the RBA’s outlook, with an increase in the expected level of inflation to peak at 7 per cent and rate rises to come harder and faster in the near term. From a portfolio standpoint we are not seeing any degradation in our underlying portfolio and open dialogue with our lenders has us confident in their borrowing base. We are maintaining a close eye on the economic environment to ensure we maintain the performance of our Fund and ensure our lenders are in a position to maintain performance and strive to capitalise off the back of economic shifts.

1 RBA Inflation and Monetary Policy Speech – 21 June 2022

2 RBA Inflation and Monetary Policy Speech – 21 June 2022

3 Australian National Accounts: Finance and Wealth

You can learn more about the Aura High Yield SME Fund here.

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The Sussex researchers who used international collaboration and 3D printing to stem PPE shortages in Nigeria

Researchers at the University of Sussex and their partners in Nigeria used open-source designs and 3D printing to reduce personal protective equipment…

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Researchers at the University of Sussex and their partners in Nigeria used open-source designs and 3D printing to reduce personal protective equipment (PPE) shortages for a community in Nigeria during the Covid-19 pandemic – tells a recently published academic paper.

Credit: Please credit Royhaan Folarin, TReND

Researchers at the University of Sussex and their partners in Nigeria used open-source designs and 3D printing to reduce personal protective equipment (PPE) shortages for a community in Nigeria during the Covid-19 pandemic – tells a recently published academic paper.

In their paper in PLOS Biology, Dr Andre Maia Chagas from the University of Sussex, and Dr. Royhaan Folarin from the Olabisi Onabanjo University (Nigeria), explain how their collaboration led to the production of  over 400 pieces of PPE for the local hospital and surrounding community, including those providing essential and frontline services. This included face masks and face shields, at a time when a global shortage meant it was impossible for these to be sourced by traditional companies. 

In their collaboration, they leveraged existing open-source designs detailing how to manufacture approved PPE. This allowed Nigerian researchers to source, build and use a 3D printer and begin producing and distributing protective equipment for the local community to use. Plus, it was affordable.

One 3D printer operator and one assembler produced on average one face shield in 1 hour 30 minutes, costing 1,200 Naira (£2.38) and one mask in 3 hours 3 minutes costing 2,000 Naira (£3.97). In comparison, at the time of the project, commercially available face shields cost at least 5,000 Naira (£9.92) and reusable masks cost 10,000 Naira (£19.84). 

Dr Maia Chagas, Research Bioengineer at the University of Sussex, said: “Through knowledge sharing, collaboration and technology, we were able to help support a community through a global health crisis. 

“I’m really proud of the tangible difference we made at a critical time for this community. As PPE was in such high demand and stocks were low, prices for surgical masks, respirators and surgical gowns hiked, with issues arising around exports and international distribution. 

“We quickly realized that alternative means of producing and distributing PPE were required. Free and open-source hardware (FOSH) and 3D printing quickly became a viable option.

“We hope that our international collaboration during the pandemic will inspire other innovators to use technology and share knowledge to help address societal problems, which were typically reliant on funding or support from government or large research institutions. 

“With open source designs, knowledge sharing and 3D printing, there is a real opportunity for us to start addressing problems from the ground up, and empower local communities and researchers.”

Dr. Royhaan Folarin, a Neuroscientist and lecturer of anatomical sciences at Olabisi Onabanjo University in Nigeria, said: 

“During the pandemic, we saw the successful printing and donation of PPE in the Czech Republic by Prusa Research and it became a goal for me to use the training I had received in previous TReND in Africa workshops to help impact my immediate community in Nigeria.”

The international collaboration came about as a result of the TReND in Africa network, a charity hosted within Sussex which supports scientific capacity building across Africa. 

After initial use, testers provided feedback commending the innovativeness, usefulness and aesthetics of the PPE and, while the team’s 3D printer was not built for large-scale serial manufacturing, they identified the possibilities for several 3D printers to run in parallel, to reduce relative production time. During the pandemic, this was successfully demonstrated by the company Prusa Research, which produced and shipped 200,000 CE certified face shields. 


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